Chancellor of the Exchequer George Osborne unveiled a cut in the government’s economic growth forecasts and said the budget deficit will take longer to tame than he originally planned.
Forecasts from the Office for Budget Responsibility show the economy will shrink 0.1 percent this year instead of the 0.8 percent growth predicted in March, and expand 1.2 percent next year instead of 2 percent, Osborne said in his autumn statement to Parliament. He extended his fiscal consolidation by one year to the 2017-18 fiscal year and said he will miss his target to start cutting debt as a percentage of gross domestic product in 2015 by a year.
The announcement drew attacks from the opposition Labour Party, which says he is damaging the economy by trying to cut the deficit too quickly. The chancellor is already struggling to rebuild his reputation after a decision to cut income taxes for the highest earners in his March budget and a series of policy U-turns cost his Conservative Party support with voters.
“While our deficit is forecast to go on falling, instead of taking three years to get our debt falling, it’s going to take four,” Osborne said. “Some say we should abandon our deficit plan, and try to borrow more. They think by borrowing more, they can borrow less. That would risk higher interest rates, more debt interest payments and a complete loss of Britain’s fiscal credibility.”
Osborne also unveiled growth forecasts of 2 percent in 2014, and 2.3 percent the year after, with further acceleration to 2.7 percent in 2016. The debt-to-GDP ratio will peak at 79.9 percent in 2015-16, and will then start to decline in following years, he said.
The OBR presented fiscal projections including and excluding the transfer to the Treasury of billions of pounds of cash held by the Bank of England under its asset-buying program.
The underlying deficit is forecast to fall from 120.3 billion pounds in the current fiscal year to 56.7 billion pounds in 2016-17, representing extra borrowing of more than 100 billion pounds compared with the March forecast.
“The chancellor’s fiscal strategy has been completely derailed,” Labour’s Treasury spokesman Ed Balls said in Parliament. “The defined purpose of the government, the cornerstone of the coalition, the one test they set themselves - - to balance the books and get the debt falling by 2015 -- is now in tatters.”
Ten-year gilts rose, with the yield falling two basis points, or 0.02 percentage point, to 1.79 percent at 2:15 p.m. in London. Two-year note yields dropped two basis points to 0.29 percent and the rate on 30-year securities climbed five basis points to 3.11 percent. The pound was little changed at $1.6090 and 0.2 percent stronger at 81.20 pence per euro.
Osborne announced range of measures aimed at boosting the economy, including a further 1 percentage point cut in corporation tax that will take the rate companies pay on their profits to 21 percent in 2014 from 24 percent currently.
To help pay for the move, the levy on bank balance sheets will rise to 0.13 percent in January from 0.088 percent. A 3 pence-per-liter increase in fuel duty planned to take effect in January was canceled to help households seeing their incomes squeezed by rising bills.
Osborne took further measures to increase the tax take from higher earners. He reduced the annual tax-free allowance on pension contributions by 10,000 pounds ($16,000) to 40,000 pounds, and cut the lifetime allowance to 1.25 million pounds, from 1.5 million pounds previously.
“I know these tax measures will not be welcomed by all,” Osborne said. “But we must show we’re all in this together. When you’re looking for savings, I think it’s fair to look at the tax relief we give to the top 2 percent.”
A document accompanying the statement showed a gain for the Treasury of 3.97 billion pounds in the current fiscal year, largely from the sale of 4G spectrum, with net giveaways of almost 1 billion pounds a year over the following three years. Cuts to departmental spending, restrictions to pensions relief and higher-rate tax allowances and cuts to welfare help raise almost 5 billion pounds in 2017-18.
Osborne’s 2010 effort to rid Britain of a record budget deficit has been blow off track twice since that year as the government has failed to fix underlying problems in the U.K. economy such as an impaired banking system and record levels of household debt.
Fitch Ratings said in September that pressure on Britain’s AAA rating had increased and there was little room to “absorb further adverse economic shocks in light of the U.K.’s elevated debt levels and uncertain growth outlook.” Net debt stood at almost 68 percent of GDP last month, according to the statistics office.
Osborne may be shown tolerance among investors who say letting the debt target slip is preferable to risking the recovery by sharply tightening fiscal policy, providing he demonstrates a commitment to deficit reduction. Ten-year U.K. government bonds currently pay just 1.8 percent, a third of the yield on similar-maturity Spanish debt.
“Yes, the deficit is still far too high for comfort,” Osborne said. “We cannot relax our efforts to make our economy safe. But Britain is heading in the right direction.”